[Why&Next] Dongwon Group Shouts 'Value-up' but Ultimately Ignores Minority Shareholders

Comprehensive Stock Swap Between Dongwon Industries and Dongwon F&B
Skepticism Grows: "Difficult to Feel Real Improvement in Corporate Value"
Additional Measures Needed to Enhance Shareholder Value

There are criticisms that Dongwon Group's comprehensive stock swap between Dongwon Industries and Dongwon F&B, promoted under the government's Value-up program to enhance corporate value, is insufficient to significantly boost the company's value.

Dongwon Group plans to delist Dongwon F&B to achieve two goals: restructuring its food business and strengthening corporate transparency. However, as it will be difficult to realize tangible results from integrating domestic and overseas food businesses and pursuing mergers and acquisitions (M&A) in the short term, additional measures are deemed necessary to enhance the value for minority shareholders.

According to the food and financial investment industries on April 29, Dongwon Industries and Dongwon F&B are scheduled to complete their stock swap as of July 13. Dongwon F&B will be delisted on July 31. Through this swap, Dongwon Industries will increase its stake in Dongwon F&B from 74.4% to 100%, establishing a wholly owned subsidiary structure.

Previously, Dongwon Group's holding company, Dongwon Industries, held a board meeting on April 14 and approved the agenda to exchange shares held by Dongwon F&B shareholders for shares in Dongwon Industries. Accordingly, Dongwon Industries will issue new common shares to Dongwon F&B shareholders at an exchange ratio of 1 (Dongwon Industries) to 0.9150232 (Dongwon F&B).

Minority Shareholders Left with No Choice

As a result, a shareholder holding 1,000 shares of Dongwon F&B will receive 915 shares of Dongwon Industries. Based on the closing price on April 28, the value after the swap is approximately 37.1 million won, slightly higher than the value of 1,000 Dongwon F&B shares (35.6 million won). However, the exercise price for the stock purchase right (32,131 won) is lower than the current share price (about 36,000 won), making it unprofitable to exit by exercising the purchase right. In effect, minority shareholders of Dongwon F&B have no choice but to accept the delisting and receive the new shares.

After Dongwon F&B is delisted, the stake held by major shareholders of Dongwon Industries, including Chairman Kim Namjung, will decrease slightly from 78.0% to 83.9%, but will still remain absolute. In addition, Dongwon Industries' stake in Dongwon F&B will increase from 74.4% to 100%, and the net profit attributable to controlling shareholders of Dongwon Industries is expected to rise by about 33 billion won, an increase of approximately 10.5%.

On the other hand, Dongwon Industries' total number of shares will increase by 12.6% from 36.02 million shares due to the issuance of new shares, and the value of existing shares is expected to be diluted by 11.2%. This is why there are criticisms that Dongwon Group's comprehensive stock swap approach is insufficient in protecting minority shareholders.

In fact, in 2023, Meritz Financial Group, when converting its subsidiaries Meritz Securities and Meritz Fire & Marine Insurance into wholly owned subsidiaries, chose a public tender offer with a 30% premium over market price rather than a comprehensive stock swap, in consideration of minority shareholders. The company established a principle of treating one share of the major shareholder and one share of minority shareholders equally,and maintained a shareholder return rate of over 50%.

Dongwon Group Headquarters located in Yangjae-dong, Seoul

Han Yoojeong, a researcher at Hanwha Investment & Securities, stated, "Dongwon Industries' related-party shareholding ratio will decrease compared to the present, but this cannot be regarded as an enhancement of corporate value," adding, "If Dongwon Industries had not canceled its treasury shares and retained them, it could have used these shares for a shareholder-friendly restructuring."

In November 2022, Dongwon Group acquired 13.81 million treasury shares (a 27.7% stake) when the unlisted holding company Dongwon Enterprise merged with the listed Dongwon Industries, but all of these shares were canceled through a capital reduction by May last year. If Dongwon Industries had not canceled these treasury shares, it could have used them to cover the 4.52 million new shares needed for the stock swap with Dongwon F&B, thereby preventing dilution of existing shareholders' stakes.

Business Restructuring Results Are a 'Distant Future'

The decision by Dongwon Group to delist Dongwon F&B is due to the limitations of its global sales structure. Dongwon Group has declared its intention to increase the overseas sales ratio of its food business from the current 22% to 40% by 2030. However, excluding StarKist, the U.S. canned tuna company, overseas sales account for only about 1% of the total.

Accordingly, the group plans to integrate Dongwon F&B, Dongwon Home Food, StarKist, and its Senegalese subsidiary Scasa to launch a 'Global Food Division' and target the North American, Latin American, and European markets. As a first step, the group will establish a dedicated food culture research team as part of its K-marketing strategy to select and promote items that are popular overseas and align with K-food trends.

However, even the core asset StarKist is facing growth limitations. StarKist holds a 46% share of the U.S. canned tuna market, but its sales have stagnated at around 1.1 trillion won over the past three years. To achieve its global expansion goals, it is considered essential to secure additional sales amounting to several trillion won.

To this end, Dongwon is preparing to pursue large-scale food company M&As. The group is reportedly searching for companies with global brands or those capable of strengthening the cold chain, which is a weakness of StarKist's ambient-focused operations. Currently, Dongwon Industries and Dongwon F&B have liquidity (including cash and short-term financial assets) of about 570 billion won.

However, there are concerns that such plans are unlikely to yield short-term results. One researcher commented, "The results of the domestic and overseas food business integration and M&A currently planned by the company cannot be realized in the short term," and emphasized, "In a situation where shareholders are being asked to wait, additional decisions to enhance shareholder value must be made."

Concerns Over Falling PBR...Lee Jaemyung's 'Liquidate Undervalued Companies' Argument Adds Pressure

The price-to-book ratio (PBR) of Dongwon Industries and Dongwon F&B was 0.5 times as of last year. This is low even compared to Samyang Foods (7.0 times) and Orion (1.1 times). PBR is an indicator calculated by dividing the stock price by net assets per share; a ratio below 1 means the market capitalization does not reach the net asset value. Due to the issuance of new shares (an increase of about 12.6%), Dongwon Industries' earnings per share (EPS) is expected to drop by about 2% as a result of this stock swap. While net assets will increase, the stock price is expected to rise only marginally, so the PBR may actually decline slightly.

An official in the financial investment industry said, "The full incorporation of Dongwon F&B could help strengthen the profit base in the long term, but it will be difficult for this to be reflected positively in the stock price in the short term," adding, "Until tangible results are achieved in global expansion, market skepticism may persist for some time." There are also predictions that the 'liquidate undervalued companies' argument raised by Democratic Party candidate Lee Jaemyung and the issue of amending the Commercial Act could become additional burdens on Dongwon Industries' holding company structure in the future.

Previously, candidate Lee, in a recent meeting with industry officials at the Yeouido Korea Financial Investment Association, remarked, "Why do shares of companies with a PBR of 0.1 or 0.2 exist?" and "Anything that muddies the market must be cleaned up. Whether through hostile takeovers or other means, they must be liquidated," he stated.